Franklin Electric Co Inc (FELE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Electric First Quarter 2011 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Patrick Davis, Treasurer. Sir, you may begin.

Thank you, [Tranitha], and welcome to Franklin Electric's First Quarter 2011 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO, John Haines, our CFO, Robert Stone, SVP of Americas Water and Gregg Sengstack, SVP of Fueling and International Water. On today's call, Scott will review our first quarter business results and John will review our first quarter financial results. When John is through we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein including those relating the market conditions of the Company's financial results, costs, expenses, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals, and sales growth involve risks and uncertainties.

These risks and uncertainties include but are not limited to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, raw material costs, technology factors, litigation, government and regulatory actions, the Company's accounting policies, and future trends and other risks which are detailed in the Company's SEC filings and are included in item 1A of part 1 of the Company's annual report on Form 10K for the fiscal year ended January 1, 2011, exhibit 99.1 attached thereto and in item 1A of part 2 of the Company's quarterly reports on Form 10Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available and the Company assumes no obligation to update any forward-looking statements.

I will now turn the call over to our Chairman and CEO. Scott?

Thank you, Patrick. We got off to a solid start in 2011 as Franklin people achieved record first quarter sales and earnings per share. Our consolidated sales were up by 16% compared to the prior year and grew by 7% excluding acquisitions and foreign currency translation effects. Our GAAP EPS increased by 45% and our EPS after non-GAAP adjustments increased by 35% compared to the first quarter 2010. Our earnings release provides a reconciliation of the adjustments and our CFO, John Haines, will provide some additional information in a few minutes.

Increasing commodity costs such as copper, steel, and plastic resins continued to have a major impact on our cost structure during the quarter. Direct materials as a percentage of sales increased by 300 basis points compared to the first quarter last year. However, we're being aided in our efforts to offset these material cost increases by the success of our strategy of moving a higher percentage of our manufacturing into world-class plants located in low-cost regions that are adjacent to our major market areas. We were able to more than offset these large material cost increases with productivity gains and operating leverage. As a result in spite of the higher material costs our consolidated gross profit margin increased by 110 basis points compared to the first quarter last year.

Over the course of the first quarter we implemented price increases averaging 3% to 5% on product lines that account for about 75% of our global sales volumes. The implementation of these increases has gone well and we expect them to be fully effective during the second quarter. We currently plan to implement price increases on the balance of our product lines over the course of the year.

Our water business represents about 80% of our consolidated total Company sales and grew by 10% compared to the prior year including 300 basis points of growth due to foreign currency translation effects. Our water sales in the US and Canada represented about 38% of our consolidated total Company revenues during the quarter and increased by 7% compared to the prior year. Our sales of industrial and irrigation pumping systems in the US and Canada grew by about 20% during the first quarter as we believe that farmers are investing in irrigation systems in order to drive up yields and capitalize on high crop prices.

Our sales of residential and light commercial clean water pumping systems grew modestly and waste water pumping systems grew by about 6% during the quarter as wet weather in portions of the country increased sump pump demand. Our water sales in Europe represented about 10% of our consolidated revenues during the quarter and grew by 3% compared to the prior year. Vertical, the stainless steel pump company based in Italy that we acquired in 2009 accounted for much of the growth with sales growing 23% compared to the prior year.

As many of our investors know, over the past several years we've focused on building a water sales and distribution base in developing regions. During the first quarter our water sales in developing regions represented about 33% of our consolidated total Company sales and grew by 15% compared to the first quarter 2010.

Latin America is our largest water systems developing region representing about 15% of our consolidated revenues. Our water sales in Latin America continued to be strong, growing by 19% compared to the prior year. Our sales growth was widespread across the region as we experienced gains of more than 20% in Brazil, Mexico, Argentina, and Chile.

Our water sales in Asia-Pacific represent about 8% of our consolidated revenues and also grew by 19% compared to the prior year during the first quarter. Our Asia-Pacific sales grew at a particularly fast pace in Southeast Asia where our first quarter revenues were up over 50% compared to the prior year.

Our water systems sales in Southern Africa represented about 6% of our consolidated revenues and declined by about 5% during the quarter as unusually heavy rainfall has caused a slow down in demand for agricultural irrigation products in that region.

Our water sales in the Middle East and North Africa represent about 4% of our consolidated revenues. In spite of the political turmoil in portions of this region, our sales grew by 27% compared to the prior year. We're continuing to see heavy spending on agricultural infrastructure in the Gulf Region and in Turkey.

On May 2, the Company closed the previously announced acquisition of an 80% equity interest in Impo Motor of Izmir, Turkey, the leading supplier of groundwater pumping equipment in Turkey. The Impo acquisition will more than double our water systems sales base in the growing Middle East and North Africa market area. The Impo brand will compliment the Company's overall marketing efforts in this region and other market regions around the globe. In addition, Impo has a modern, well-managed manufacturing facility. We expect this factory will be a world-class, low-cost manufacturing site for supplying our products throughout the region.

Our global fueling systems sales represented about 20% of our consolidated revenues during the first quarter and increased by 48% compared to the prior year and by 9% excluding the PetroTechnik acquisition. With the PetroTechnik acquisition, Franklin is the world leader in filling station pipe and containment systems. The demand for these products is growing globally as there is a need for investment in filling station infrastructure, particularly in developing regions where the population of motor vehicles is growing rapidly.

During the first quarter our pipe and containment sales increased by 11% excluding the PetroTechnik acquisition and by over 150% including the acquisition? Our global sales of fuel pumping equipment grew by 15% during the first quarter as station owners around the world continue to convert from suction to pressure pumping technology.

Turning to our outlook for the second quarter, we're forecasting that our water sales will grow 7% to 12% compared to the prior year with the Impo acquisition providing about 300 basis points of the growth. Due to the impact of raw material inflation, we are forecasting that our water operating income before restructuring charges will grow at a modestly slower rate than our sales during the second quarter increasing by 5% to 9%.

We anticipate that our second quarter fueling sales will grow by 30% to 40% with the PetroTechnik acquisition providing about two-thirds of the growth. We believe that our fueling operating income will grow by 20% to 25% compared to the second quarter prior year after adjusting for the $3.8 million in legal matters that we incurred last year. In total, we expect that our second quarter 2011 consolidated operating income after non-GAAP adjustments will increase by 8% to 12%. We anticipate that as a result of tax planning initiatives, our second quarter effective tax rate will be about 27% compared to about 32% last year.

I'll now turn the call over to John Haines, our CFO, who will provide some additional information on our financial performance. John?

Thank you, Scott, and good morning. Our fully diluted earnings per share were $0.45 for the first quarter of 2011, a record for any first quarter in the Company's history and an increase of 45% compared to the 2010 first quarter fully diluted earnings per share of $0.31. As we note in the table in the earnings release, there are a number of specific items in the first quarter of 2011 and 2010 that impacted operating income and EPS that were not operational in nature, collectively referred to as the non-GAAP adjustments. We believe presenting these matters in this way gives our investors a more accurate picture of the true operational performance of the Company. These matters were as follows.

In the first quarter 2011 fueling systems incurred a $0.7 million pretax expense as a result of a revised accrual for claims made by the California Air Resources Board and local air districts in California. This expense which was recorded in SG&A lowered 1Q 2011 EPS by $0.02. Also in the first quarter 2011 the Company entered into a forward purchase contract for Turkish lira for a portion of the estimated acquisition price of the Impo transaction. The contract was outstanding as of the end of the first quarter and resulted in a gain in other income of approximately $0.6 million or an EPS increase of $0.02. Finally, in the first quarter of 2011, the Company's EPS included $0.01 of restructuring charges. The Company's EPS after these non-GAAP adjustments was $0.46 versus the reported $0.45.

In the first quarter of 2010 there were two non-GAAP adjustments to EPS. The first was a pretax gain of $1.2 million recognized as a reduction to SG&A expense on the sale of land and buildings in South Africa, an EPS adjustment of $0.03. The second was an EPS adjustment of $0.06 for previously announced restructuring charges. In total, the EPS after non-GAAP adjustments in the first quarter of 2010 would've been $0.34 and when compared to the $0.46 from the first quarter of 2011, increased by 35%.

First quarter 2011 sales were $185.3 million, an increase of 16% compared to 2010 first quarter sales of $160 million. Water systems revenues increased to $147.2 million or about 10% overall from the first quarter of 2010. All of the growth was organic and included $4.2 million of foreign exchange impact as the dollar weakened against many international currencies versus the first quarter of 2010.

As Scott indicated, sales of industrial and irrigation pumping systems in the US and Canada, along with developing region sales in Latin America and Asia-Pacific were particularly strong in the quarter versus the first quarter 2010. The acquisition of the Turkish pump manufacturer Impo was completed on May 2 with cash on hand. We believe Impo will be accretive to our 2011 earnings and provides geographic expansion for water systems in the Middle East and North Africa. Impo has approximately $28 million in annual sales.

Water systems operating income after non-GAAP adjustments was $21.9 million in the first quarter, an increase of 20% versus the first quarter 2010. Compared to the first quarter 2010, the water systems gross profit margin increased by 150 basis points as plastics manufacturing expenses and operating leverage combined more than offset a 260 basis point increase in raw material costs as a percentage of sales. The first quarter operating income margin after non-GAAP adjustments increased to 14.9% or 130 basis points as a percent of sales compared to the first quarter 2010.

Fueling system sales were $38.1 million, an increase by 48% during the first quarter of 2011 compared to the same period in the prior year. Excluding the PetroTechnik acquisition, first quarter sales were $28 million and grew by about 9% with most of this growth being in the United States and Canada. Fueling systems operating income after non-GAAP adjustments was $6 million in the first quarter of 2011 compared to $4.4 million after non-GAAP adjustments in the first quarter of 2010. Gross profit margins in the quarter were down 240 basis points due to higher material costs and lower margins on PetroTechnik product sales. The previously announced PetroTechnik acquisition added $2.2 million of SG&A expenses in the quarter.

The Company's consolidated gross profit was $60.5 million for the first quarter of 2011, an increase of $9.9 million from the first quarter of 2010 and a record for any first quarter in the Company's history. The gross profit as a percent of net sales increased to 32.7% for the first quarter of 2011 from 31.6% for the first quarter of 2010. The gross profit margin improvement was due to lower labor and variable burden costs and leveraging fixed costs on higher sales partially offset by higher material costs.

During the first quarter of 2011, consolidated SG&A expenses increased by $8.3 million or about 23% compared to the first quarter of 2010. The first quarter 2010 SG&A was reduced by the $1.2 million gain on the sale of land and building in South Africa. The SG&A increase in the first quarter 2011 is primarily attributable to the previously announced PetroTechnik acquisition, global IT expenses related to the integration of prior acquisitions on to the Company's primary ERT system, and higher RD&E spending.

There were $0.4 million in restructuring expenses in the first quarter of 2011 that were primarily the additional write-down of assets to their market values from the Siloam Springs plant closing. The Company intends to announce phase four of the global manufacturing realignment program in the second quarter of 2011.

The effective tax rate for the first quarter 2011 was 27%. The Company believes this is a reasonable estimate for the balance of 2011. The projected tax rate will continue to be lower than the 2010 rate and the statutory rate primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings after the restructuring of certain foreign entities. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit.

During the first quarter the Company used $20.4 million in cash for operations versus $12.6 million in the same period of 2010. Principle uses of cash in the quarter were payments related to incentive compensation, payments for certain legal matters, benefit plan contributions, and stock purchases of approximately 99,000 shares. Inventory was $153 million at the end of the first quarter 2011, 9% higher than at yearend 2010. The Company changed the accounting method by which it values certain inventory from LIFO to FIFO and has restated the prior year inventory balances and financial statements to reflect the change. The Company had no outstanding balance on its revolving debt agreement at the end of the first quarter 2011 or at yearend 2010.

This concludes our prepared remarks. We'd now like to open up the call for questions.

Thank you. (Operator Instructions) Our first question is from Matt Summerville with KeyBanc. Your question please?

Good morning. Couple questions. First, I think, John, you mentioned phase four of the manufacturing realignment. Can you talk about where you are today in terms of the mix of man hours being generated in low-cost region manufacturing facilities and if you can maybe delineate a little bit between the clean water business and the greywater business, where you're at there?

This is Scott, Matt. In total, as of right now, about 65% of our total manufacturing man hours across the entire Company are in low-cost regions and by the end of the year that number will be right at 70%. And most of our US-Canada greywater -- most of it, manufacturing is currently in the US and Canada and we are migrating that over time to our facility in Mexico. And then of course we produce greywater products in Brazil. We produce some greywater products in Southern Africa and some in Italy as well.

Okay. And Scott, can you talk about with Impo how that facility sort of plays into your low-cost region manufacturing strategy and maybe talk about whether or not they currently have a meaningful amount of excess capacity based on that $28 million revenue run rate you described?

Impo has really a first-class manufacturing facility that they are expanding right now and in fact the expansion is -- Gregg, it's just complete isn't it?

Just walked through their new building two days ago, Scott.

Which gives them more physical space for producing significantly more product. I think we have the physical space in Izmir to take on tens of millions of dollars more manufacturing and in fact their manufacturing cost base is materially lower than the manufacturing cost base in Western Europe. So, it certainly presents us with strategic opportunities.

One last question and I'll get back in queue. Can you talk about specifically in your irrigation agriculture-related markets kind of how that business ramped up throughout the quarter and I guess especially in North America here how weather issues either good or bad are manifesting themselves into order rates currently in that business?

I'll let Robert Stone who runs our Americas Water Systems Group comment on that.

Matt, it's been very good in certain areas of the country. If we just look at the US right now and not as good in other areas. West Texas had a very good start for example. Other parts of the country were not as fortunate. Certainly the rains in the Southeast have not helped some of those areas in terms of the need for irrigation pumping equipment. But generally as Scott mentioned in his comments, farmers seem to have a good amount of cash. Prices for commodities are at record levels still. The global outlook for harvest is not terribly rosy which actually is good for our farmers. How the rest of the year develops will depend on what the weather situation turns out to be. If we have normal weather our expectation is that the irrigation business this year will be very good.

Can you just remind me, Bob, what sort of comps you face in your ag business in the second and third quarter?

I would say we had a good year but not a great year last year. So, the year over year comps are not easy but they're not as difficult as they would've been in some other product areas.

Thanks, guys.

Thank you. There are appearing to be no additional questions in queue at this time. I would now like to turn the call back over to Mr. Scott Trumbull for any further remarks.

We thank you all for your interest in Franklin Electric and that concludes our conference call.

Ladies and gentlemen, thank you for your participation. That concludes today's conference. You may disconnect and have a wonderful day.